The Blue Book: Taxes

Federal and State tax authorities are aware that contributions to the retirement plan that were made prior to July 1, 1989 were made with already taxed dollars.

Since these contributions toward your retirement have already been taxed, you are entitled to recover an equal amount, tax free, when you retire.

For many years, the tax regulations authorized immediate recovery of taxed contributions by not taxing pensions until the pension amount received equaled the amount of the already taxed contributions. After that time, the entire pension was taxable.

In 1986, Congress decided that pensions would be taxed from the first pension check. The IRS created a rather complex mathematical formula using seven different life expectancy charts to calculate the recovery of your already taxed contributions in smaller increments over a longer period of time.

Since January 1, 1998, the "safe-harbor method" uses a separate table for calculating the taxable amount for retirees with an Eligible Spouse/Domestic Partner or Beneficiary who will receive a monthly continuance after the retiree dies.

The simplified safe-harbor method determines the amount of your pension that will not be taxed and the length of time for that exclusion. It is based on the chart and formula below. By subtracting the tax-free amount from your gross pension for a fixed number of months, your already-taxed contributions will be recovered. Cost-of-living pension increases will not change or have any effect on the tax-free amount since the calculation is based upon your original retirement allowance.

**Safe-Harbor Formula - Table 1**
Age at Retirement		Number of monthly payments to recover already taxed contributions
55 and under		360
56-60		310
61-65		260
66-70		210
71 & over		160

The Safe Harbor Formula - Table 1 is used for all retirees who do not have an Eligible Spouse/Domestic Partner or Beneficiary who will receive a continuance. Table 2 will be used for all other retirees.

Example: A single retiree at age 55 has a total of already-taxed contributions amounting to $23,781.60.
$23,781.60 / 360 = $66.06

Note: Do not confuse your already-taxed contributions with the total amount in your retirement account as shown on your annual statement. This total amount includes interest credited to your account and not yet taxed contributions made since 1989.

Therefore, in this example the taxable amount of the retirement allowance, would be as indicated in the right-hand column below:

	Amount of monthly retirement allowance	Less tax excludable amount for 360 months	Monthly taxable amount
Option Full	$2,158.40	$66.06	$2,092.34
Option A	$2,141.13	$66.06	$2,075.07
Option B	$2,006.84	$66.06	$1,940.78
Option C	$2,079.86	$66.06	$2,013.80
Option D	$2,082.62	$66.06	$2,016.56

In this example, the retirement allowance would be fully taxable after 360 months.

Table 2 is based on the combined ages of the retiree and the Eligible Spouse/Domestic Partner or Beneficiary who will receive a continuance.

**Safe-Harbor Formula - Table 2**
Combined ages at retirement		Number of monthly payments to recover already taxed contributions
110 and under		410
111-120		360
121-130		310
131-140		260
141 & over		160

Example: A 55 year old retiree has a 54 year old Eligible Spouse/Domestic Partner who will receive a continuance. The total amount of already-taxed contributions is $23,781.60. Using the Safe-Harbor Formula - Table 2, the total amount of monthly payments to recover the already-taxed contributions is calculated as follows:

The number of payments for the combined age of 109 is 410.
$23,781.60 / 410 = $58.00

NO. You may arrange to pay your own Federal and State taxes by filing quarterly returns. However, you must complete a W-4P Retirement Tax Withholding Card for our records even if you choose not to have income taxes withheld from your monthly retirement allowance

Yes. At your request, the Retirement Office can withhold for Federal and/or State taxes. You will be given a tax withholding card to sign when you sign your retirement papers. After that time, you may file a new tax withholding card anytime either in the Retirement Office or by mail.

What happens if I die before recovering the benefit of the excludable contributions?

The excludable amount continues to your Eligible Spouse/Domestic Partner or Option B or C beneficiary until the excludable contributions have been recovered. If you do not have an Eligible Spouse/Domestic Partner or Option B or C beneficiary at the time of your death, the unrecovered balance of your excludable amount may be deducted from the tax return of your estate for the year during which your death occurs.

What if the excludable amount has not been fully recovered by the time my Eligible Spouse / Domestic Partner or Option B or C beneficiary dies?

The unrecovered balance of your excludable amount may be deducted from the tax return of the estate of the Eligible Spouse/Domestic Partner or Option B or C beneficiary for the year during which his or her death occurs.

If I move away from California, do I still have to file a state tax return with the State of California?

No. Since tax year 1995, Federal legislation prohibits California from taxing non-residents of California for pensions even if they are earned in California. If you move out-of-state, you must call the Retirement Office to change your address. Do not forget to request a W-4P Retirement California Tax Withholding card to stop withholding for California state taxes. If you are a resident of California part of the year, the retirement checks you receive while a California resident are subject to California state income tax.